Patricia Williams, tax dispute expert at Bowmans and chair of the SAIT tax administration work group.
Recently retrenched? You might have been overtaxed. Retrenchments over the past 12 to 18 months are specifically at risk of having been incorrectly treated for tax purposes, particularly so-called “voluntary retrenchments”. Given the financial hardship and vulnerability of retrenched employees and their dependants, getting any overpaid taxes refunded is of great importance.
Favourable tax treatment for ‘severance benefits’
Payments that are “severance benefits” for tax purposes should qualify for favourable tax treatment. Broadly speaking, there is a once-off tax exemption for R500,000 of these benefits, and lower tax rates for the balance.
An amount may be a severance benefit that qualifies for this favourable tax treatment if the employee is retrenched due to the operational requirements of the employer, employment is terminated because of sickness, accident, injury or incapacity, or where the employee is 55 years or older. In the case of retrenchment, this must be as a result of the employer ceasing to carry on an area of trade, or a general reduction of personnel or reduction of a certain class of personnel.
Potential problem for employees
The problem for an employee is that the employer is responsible for classifying the payments made, both in the application to SARS for a tax directive and in the “source code” that is put on the employee’s tax certificate (IRP5). As an individual, when you submit your tax return, your IRP5 is usually pre-populated on the tax return, and the source code applied by your employer tells SARS how you must be taxed. If, then, your employer put the wrong code on your IRP5, you may end up being incorrectly taxed.
Specific reason why the wrong tax treatment may have been applied
SARS issued a Completion Guide for IRP3(a) and IRP3(s) Forms, on or around July 2017, in terms of which there is an implicit legal interpretation that “voluntary retrenchment” does not qualify for the normal tax treatment of severance benefits. This implicit interpretation created a material negative impact on taxpayers as a whole and various tax practitioners believed that it was incorrect. SAIT made submissions to SARS, with employment law input from Bowmans. SARS accepted these submissions, and indicated that “voluntary retrenchments” (as these would be considered in labour law) should be classified as “involuntary” in the application for a tax directive, and that a new guide would be issued as soon as practically possible.
This aspect may, still, be a problem in relation to the past. Either as a result of the Guide, or from discussions with SARS on how to apply for directives (for the period before the Guide was issued), various employers may either have been explicitly instructed, or implicitly told (as a result of the Guide) to apply the less favourable tax treatment to retrenchment payments to employees.
This means that, if you were retrenched within the past year to 18 months, there is a real possibility that the tax deducted at the time, and the tax codes that tell SARS how to tax you when you file your tax return, might be incorrect, resulting in significant overtaxation.
How to tell from your IRP5 if you may have been overtaxed
If you were retrenched (not as one person with a “mutual separation” agreement but as part of the overall retrenchment of a group of people), you should check your IRP5 certificate to see if you were perhaps overtaxed.
The payout you received should be reflected with source code 3901, and the employees’ tax (PAYE) deducted should be reflected with source code 4115. If these are the codes on your IRP5, you were probably correctly taxed.
If, in contrast, the payout you received was reflected with source code 3907, and the employees’ tax was reflected with source code 4102, then you were probably overtaxed.
What to do if you have not submitted your tax return yet
If you have not submitted your income tax return yet, covering the period when you received your severance benefit, then the problem can be fixed during the tax return submission process, either when submitting your return or objecting against the assessment as soon as the return has been submitted (ideally incorporating a formal request for a reduced assessment). This issue should be discussed in some detail with the registered tax practitioner who helps you with your tax returns. If you do not have a registered tax practitioner helping you, it would be a good idea to get help for this specific tax return filing.
What to do if you have already submitted your tax return
If you have already submitted your tax return, you would normally already have been assessed. You would need to object against the assessment, preferably including a formal request for a reduced assessment. SARS has guides explaining how to object against an assessment. It would be a good idea to get help from a registered tax practitioner for this specific objection.
Grounds for objection
The grounds for your objection would be that the relevant amount is a “severance benefit”, source code 3901, and not an “other lump sum” (source code 3907); and that the employees’ tax paid should be reflected with source code 4115, being tax on a severance benefit lump sum, and not “normal” employees’ tax (source code 4102). The supporting letter to your objection should explain that the amount you received is a severance benefit for tax purposes, give the reason (for example that your employer engaged in a general reduction of personnel), and explain that you are accordingly entitled to the tax exemption and special tax tables applicable to severance benefits.
One is normally only allowed to object within 30 business days of the tax assessment. In all likelihood, your objection would be late, by a long enough period that you have to explain to SARS what the “exceptional circumstances” are, for your late objection. If you do not explain this, SARS may well declare your objection invalid, because it is late.
You should explain the situation, and how it came to be that you only realised the mistake in your tax assessment now. Then, some of the key exceptional circumstances that you can refer to, include:
- The original reason for the mistake was the incorrect classification by your employer of the severance benefit amount. This is a circumstance outside your control. A capturing error or provision of incorrect information in a tax directive application and IRP5 certificate issued by your employer, is of analogous seriousness to a capturing error or provision of incorrect information by SARS, and so this is an exceptional circumstance in terms of section 218(2)(e) read with (g) of the Tax Administration Act;
- To the best of your knowledge and belief, the incorrect classification by your employer arose as a result of an erroneous implicit interpretation adopted by SARS, as also set out in the first publication of the “Completion Guide for IRP3(a) and IRP3(s) Forms”. This comprised the provision of incorrect information in an official publication by SARS, as envisaged in section 218(2)(e) of the Tax Administration Act, which is an exceptional circumstance;
- The e-filing system is set up so that the individual’s tax return is pre-populated with the IRP5 information submitted by the employer, and which cannot typically be deleted or amended. This demonstrates that it is not the responsibility of the individual to insert, or even consider and amend, the relevant tax information, and the individual is supposed to have her or his tax correctly calculated and documented in the IRP5, by the employer and SARS jointly. The employee having to consider and correct any such information is clearly an exceptional circumstance, not provided for in the SARS e-filing system.
If you have been retrenched over the past 12 to 18 months, there is a real risk that you may have been incorrectly overtaxed. A registered tax practitioner may be able to help you claim back any overpaid taxes.
Williams, P. 25 May 2018.FA NEWS. Overtaxed on retrenchment: Get your overpaid taxes back. Available from https://www.fanews.co.za/article/tax/16.